Affordability Doesn't Mean What You Think

Imagine you are an economically literate urbanist and you have been asked to testify as an expert on urban policy.  The situation is this:  the county includes a large and growing city as well as a much smaller town that is connected to the city by a road.  The town has some retail and other employment, but a significant number of its residents commute to jobs in the big city.  However, this has grown increasingly unpleasant as the result of congestion on the road that connects the town to the city.  Voters are complaining that the commute is terrible, and the county legislature is determined to take action.  In particular, the proposal is to add an extra lane of traffic on the road, increasing its capacity.

Here is how the testimony might go:

Commissioner LaGrande:  Will adding a lane to the road reduce congestion?

You:  No, it will do nothing of the sort.

[audience gasps]

LaGrande:  Explain yourself!  The problem is that too many people are trying to get from the town to the city every morning, and from the city to the town every evening.  Adding a lane will make the road less crowded and result in less congestion, won't it?

You:  Respectfully, commissioner, we need to consider the concept of "induced demand."  It's true that in the short term, congestion might decrease when an extra lane is added.  But things don't stop there.  Now that the commute is easier, it will be more attractive for workers to live in the town and drive to the city.  As workers move to the town, congestion will increase, and this process will continue until the congestion returns to roughly where it was to begin with.

LaGrande:  So you're telling me there's no long-term benefit and we shouldn't add the lane?

You:  That's not what I'm saying.  What I'm saying is that the benefits don't include a long-term reduction in congestion.  Instead, the potential benefits have to do with increasing the population of the town—with the added lane, more people can live there, and the city's workforce is also increased.  This could help the economy grow, benefiting both landowners in the town (who can convert farmland to higher-value residential developments) and businesses in the city (who have a larger pool of labor to draw on).  Of course, these benefits may or may not outweigh the costs—I can't tell you how to make the trade-off.  But I can tell you that an honest accounting of the benefits doesn't include a long-term reduction in congestion.  For that, you would need to turn it into a toll road or something like that.

This is very standard stuff.  Anyone who supports adding a lane in these circumstances shouldn't sell it as an anti-congestion measure.

Now the city council calls you to testify on a new land-use policy that will facilitate denser development.  By coincidence, LaGrande serves on both the county commission and the city council.

 Councilor LaGrande:  Will allowing more development reduce rents?

You:  Of course it will, it's basic supply and demand.  As supply increases, rents will fall.

[audience nods appreciatively] 

This is very standard stuff.  Anyone can understand that increasing supply reduces prices.  But you might feel a slight twinge of discomfort, a little bit of cognitive dissonance.  After all, earlier you told LaGrande that "induced demand" means that increased road capacity will translate into increased population, but not into reduced commute times.  Now you've implicitly told LaGrande that the concept of induced demand doesn't apply to rent.  A city can achieve a permanent reduction in market rents by allowing more development.  The reduced rent will not draw more people into the city, pushing rents back up to their equilibrium level.  Because...  [crickets chirping].

And this is why I think urbanism is being mis-sold.  It's absolutely true that in the short term an increase in the supply of housing should translate into rents that are lower than they would otherwise be.  But this will draw people into the city, and it's not clear that the long-term result is lower rents.  In fact, if the city is attractive primarily because of the social and economic opportunities that stem from living near so many other people, then the long-term effect of increased development is probably rents that are higher than they otherwise would have been.

That's why this Matt Yglesias tweet is (perhaps unintentionally) very revealing about what "affordability" means to him:

We know dense housing increases affordability because if the city gets denser then by definition more people can afford to live in it.

— Matthew Yglesias (@mattyglesias) June 30, 2016

Got that?  Affordability shouldn't be understood in terms of the level of rent.  It should be understood in terms of the number of people who live in the city.  So when Yglesias proclaims that cities can increase their affordability by allowing more development, his readers should understand that "affordability" is a term of art and that he is not saying that rents will be lower than they otherwise would have been.  Low rents have nothing to do with affordability.  Affordability just is density, so allowing an increase in density by definition increases affordability, even if rents go up by a lot.  (This makes it odd that the title of his book arguing for more development is The Rent Is Too Damn High, which is why I feel his tweet's honesty may be unintentional.)

I want to emphasize that density does in fact have a lot of benefits (as does increased transportation capacity).  But just as increased commuting capacity shouldn't be sold to the public on the grounds that it will reduce commute times, increased development shouldn't be sold to the public on the grounds that it will reduce rents in the long term.  The long-run benefits have to do with giving more people access to the city's amenities, which may also increase the value of the city to its existing residents.  (After all, to repeat my earlier point, the big attraction of living in a city is that it puts you into easy contact with a lot of other people.)  But for some reason, advocates of density often choose to frame their arguments in a very misleading way, and I think this helps explain the backlash against dense development.  The urbanist promises are never kept.  This is a big problem for urbanism and it will continue to be a problem until we can be more honest about the effects of our preferred policies, something we learned to do a long time ago when it comes to congestion.